USD 100 again "breaking through": deductions and impacts

This is the second attempt this year for the US Dollar Index to appreciate and break through 100. The last occurrence was at the end of July this year, after which it experienced a significant decline due to the non-farm payroll data on August 1 being significantly below expectations, followed by a second bottoming out. So this time, under the circumstances of a US government shutdown and without interference from US data, how will the Dollar Index's "breaking 100" trend be different? Coincidentally, today's market is very volatile; of course, it cannot all be attributed to the strong dollar, but the dollar breaking 100 is indeed an important warning signal.

Let's first take a look at what is different?

First, both instances are backed by TACO and a reversal of easing expectations, but the macro environment is significantly different. The economic data for June released in July, especially the consumption data exceeding expectations, reflected a phase of rebound in the US economy after the first round of tariff shocks, leading market expectations to shift from a previous "recession" mode to "recovery."

Currently, the market resembles "autopilot" under the absence of economic data, with concerns about Powell's hawkish remarks but struggling due to a lack of official data to counter them.

Second, the external drivers are different. In July, the currency that depreciated the most against the dollar among the G7 was the British pound: continuous economic weakness and poor fiscal conditions made it the weakest link.

In this round, the yen is leading the decline, with Japan's own political and economic situation playing an important role: on one hand, the new Prime Minister, Kishida Fumio, has taken over the loose "mantle" of Abenomics; on the other hand, due to being overly "friendly" to the US, the trade agreements Japan has reached with the US have instead placed it in a more disadvantageous position compared to China and South Korea.

So, will the outcome this time be different?

We tend to believe that the breakthrough of the Dollar Index this round will be relatively more "successful" than in July—the rebound point may be higher (101 to 103), and the duration will be longer, at least until after the US government reopens, when continuously weak economic hard data will correct market expectations.

However, we do not believe that a dollar appreciation cycle is coming; currently, the dollar is more of a rebound:

In the short term, the market has already begun to price in no interest rate cuts in December (the expected probability has exceeded 30%), which leaves significant room for subsequent policy expectation adjustments.

Additionally, before the end of the year, the White House will announce the Federal Reserve Chair nominee. From the popular candidates, the policy distinction lies only in "easing" or "extreme easing," which is expected to be bad news for the dollar

In the medium to long term, the Federal Reserve is still in a rate-cutting cycle (and the more hesitant it is now, the more likely it is to accelerate rate cuts later); the debt issue in the United States and the fiscal efforts in Europe are well-trodden logic.

Moreover, a more important point is that if the dollar embarks on a path of appreciation, the underlying implication is that the Trump 2.0 policy framework is successful, and the U.S. economy and society will smoothly emerge from difficulties. The reality is that the scale of U.S. debt is still setting historical records, and many of Trump's current domestic and foreign policies are aimed at immediate benefits rather than solving long-term structural issues. If this is considered success, then it can only be said that the shift in market pricing paradigms has taken too big a step.

From an asset perspective, the biggest difference in the current market compared to before is that the prices of many assets (especially risk assets) have significantly increased after the fermentation in September and October, which will amplify the "side effects" brought by the dollar's rebound—potentially helping gold and silver find a bottom, as well as assisting the equity market in digesting elevated valuations.

Author of this article: Shao Xiang, Source: Chuan Yue Global Macro, Original title: "Dollar 100 Reaches Another 'Checkpoint': Simulation and Impact (Minsheng Macro Shao Xiang)"

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